The business model and competitive strategy of IKEA in India

INTRODUCTION

This is a good international business case. The IKEA case provides an excellent opportunity to apply strategic management concepts to a large privately-held company that is expanding into India. IKEA is a Netherlands-based Swedish company with a presence in 44 countries around the world, including the US, the UK, Russia, the EU region, Japan, China and Australia. It is the largest furniture retailer in the world but did not enter India until 2013, despite the fact that it has been sourcing from India since the 1980s.

The purpose of this case study is to examine the factors that are crucial to IKEA’s continued success and to propose strategic actions to sustain its competitive advantage. The case opens with a review of the company’s humble beginning. IKEA was founded by 17-year-old Ingvar Kamprad (Kamprad) in Sweden in 1943. By the 2000s, IKEA has become the world’s largest furniture retailer. The corporate structure was constructed to prevent any takeover and to protect the family from taxes. Thus, the structure is a complicated arrangement of not-for-profit and for- profit organisations. The IKEA stores provide customers with a unique shopping experience with low prices, solid quality, modern designs, and most importantly, the concept of do-it-yourself (DIY) products.

The extensive discussion is followed by a description of the furniture industry in India and what IKEA had to overcome in order to enter the Indian market. IKEA first met with regulatory and political roadblocks, and then had to work with suppliers in order to meet the Indian government’s requirement for sourcing. Finally, there are several challenges that IKEA faces.

This case is ideal for demonstrating the importance of the general environment, international corporate-level strategy and type of entry. The following points are to guide a review and discussion of these important concepts.

  •  Review IKEA’s general environment segments and elements in India. What are the segments in the general environment that relate to IKEA’s situation?
  •  Describe IKEA’s intended international corporate-level strategy in India. Is it different from other countries?
  •  What is IKEA’s choice of international entry mode? What are the advantages and disadvantages compared to other international entry modes?
  •  Identify IKEA’s current challenges in India. Based on your analysis, what additional recommendations would you make to help IKEA achieve its goals?

Hanson 6e – Case Analysis ANALYSIS

Review IKEA’s general environment segments and elements in India. What are the segments in the general environment that relate to IKEA’s situation?

Factors in the general environment that impact IKEA in India are primarily demographic, economic, political/legal, sociocultural, and sustainable physical environment segments. The primary segments and elements in the general environment that relate to IKEA’s situation are:

General Environment in India

Segments

Elements

Demographic Segment

Low household income

Large population size

Dense population in the cities

Large income gap

Economic Segment

One of the fast growing economies in the world

Political/legal Segment

Corruption issues

Difficult FDI policies

Some regulatory/political roadblocks

Sociocultural Segment

People prefer readymade furniture

People prefer shop assistants

Cultural difference from other developed countries

Sustainable Physical Environment Segment

Availability of renewable energy

As the table above shows, the general environment in India is very different from other countries in which IKEA has opened retail stores. The initial cost of entering the Indian market will be substantial. For example, the real estate cost in the cities is extremely expensive. People in India generally have small cars and may not travel a far distance to a store. Thus, if IKEA opens a store outside of the city, this could impact the sales negatively. On the other hand, if IKEA opens a store in a city, the real estate price will be extremely high and it will be very difficult to buy a large land like what IKEA usually does in other countries. The following table shows the financial highlights of IKEA:

 

Revenue Cost of Sales Operating Cost Net Income

2012 27,628 15,723 2011 25,173 13,773 2010 23,539 12,454 2009 21,846 11,878 2008 21,534 11,802

8,423 3,202 7,808 2,966 7,888 2,688 7,198 2,538 7,078 2,280

In order to sustain IKEA’s continued success, IKEA will have to address each segment in the general environment. It will be very likely that the cost of sales and operating cost will increase dramatically in the year that IKEA opens a new store in India, which can have a negative impact on the overall financial health of IKEA globally.

Describe IKEA’s intended international corporate-level strategy in India. Is it different from other countries?

A firm’s international strategy is a strategy through which the firm sells its goods or services outside its domestic market. There are several reasons for IKEA to pursue an international strategy:

  •   International markets yield new opportunities: If IKEA had stayed in Sweden, it would have been limited by the size of the market in Sweden. Therefore, it would not have become the largest furniture retailer in the world had it not expanded outside of Sweden.
  •   Needed resources can be secured: Because IKEA is the world’s largest furniture retailer, it needs a lot of resources at the lowest price. When IKEA implements an international strategy, it can secure needed resources at the lowest price because of the volume it purchases from the suppliers.
  •   Greater potential product demand: IKEA’s revenue growth since 2001 has been positive due to the global expansion. A table of IKEA’s revenue growth (total revenue in billion €) is as below:

Year Amount Growth since last year

  1. 2001  10.4
  2. 2002  11.0
  3. 2003  11.4
  4. 2004  12.9
  5. 2005  15.0
  6. 2006  17.5
  7. 2007  20.0
  8. 2008  21.5
  9. 2009  21.8
  10. 2010  23.5
  11. 2011  25.2
  12. 2012  27.6

N/A 5.77% 3.64% 13.16% 16.28% 16.67% 14.29% 7.50% 1.40% 7.80% 7.23% 9.52%

 

 Borderless demand for globally branded products: IKEA usually have standardised design with the concepts of DIY and flat packs.

There are three types of international corporate-level strategy:

From the descriptions of the case, IKEA is able to achieve global strategy for its stores in most countries. IKEA’s global strategy includes the following:

  •   Large retail space
  •   Renewable energy use
  •   Including standardised services such as food and beverage and play house
  •   Providing a unique furniture shopping experience as a whole
  •   Furniture in flat packs
  •   Concept of DIY
  •   Global sourcing
  •   Strategic and operating decisions are centralised at the home office
  •   Emphasises economies of scale

    However, for IKEA’s intended international corporate-level strategy in India, it seems transnational fits the best. There are several reasons:

  1. Retail space in India is extremely expensive, so a large retail space may not be feasible
  2. Renewable energy use is challenging in India
  3. Certain services and products are prohibited by the government in India

    due to FDI restrictions. Therefore, a customer in India may not receive the

    same unique furniture shopping experience as a whole

  4. There are sourcing requirements from the Indian government (mandatory

    30% from preferably MSMEs)

  5. Customers in India like readymade furniture so the concept of self-service

    and DIY products may not work in India

  6. The culture and taste of the consumers in India are still unknown to IKEA.

    Thus, the reception of the IKEA products is still unpredictable

     

As Dutta of Third Eyesight puts it, ‘In India, the cost of real estate is high, retail space availability is an issue and overall store efficiency is a big challenge. They can’t cut and paste their global model here. They have to develop India-specific strategy.’

What is IKEA’s best choice of international entry mode? What are the advantages and disadvantages compared to other international entry modes?

There are five main types of international entry mode: exporting, licensing, strategic alliances, acquisitions and new wholly owned subsidiary. IKEA’s choice of international entry mode is new wholly owned subsidiary. IKEA is a privately-owned company. When IKEA enters a new country, it usually builds its own retail space and implements a global international strategy.

A new wholly owned subsidiary is also called a Greenfield venture. It is when a firm invests directly in another country/market by establishing a new wholly owned subsidiary. There are several advantages and disadvantages. The advantages are:

  •   Allows for maximum control
  •   Has the highest potential returns

    The disadvantages are:

  •   Is costly
  •   Involves complex processes
  •   Carries high risk

    IKEA pursues a strategy of a new wholly owned subsidiary due to the need for global integration is high. In doing so, IKEA can secure a stronger presence in the international markets.

    STRATEGIES

    Identify IKEA’s current challenges in India. Based on your analysis, what additional recommendations would you make to help IKEA achieve its goals?

    IKEA’s current challenges in India are:

  •   The availability of retail space and its cost
  •   Hiring activities and vendor negotiations
  •   Last mile supply chain issues
  •   IKEA’s do-it-yourself (DIY) concept may not work in India
  •   IKEA’s anti-corruption policy
  •   Reception of IKEA’s products is unpredictable

 

The availability of retail space and its cost

Based on the analysis, IKEA has two choices in terms of retail space and location: in the city (smaller retail space) or outside of the city (larger retail space). In addition, IKEA has certain renewable energy initiatives that are unlikely to be met by the Indian developers. Thus, the cost of real estate, retail space availability, and store energy efficiency will be a big challenge for IKEA. It will have to develop an India- specific strategy for its retail space. IKEA is more likely to benefit from a smaller retailer space in or near the city.

Hiring activities and vendor negotiations

People in India may have initial euphoria on IKEA’s entry into India, but with proper education and training, IKEA should be able to solve this issue. IKEA should seek to conduct more charity and public relations events to improve its image. Vendor negotiation will be a big issue due to the government’s requirement on sourcing (30% from preferably MSMEs). IKEA was able to negotiate with the government on the mandatory 30% from MSME’s to preferably MSMEs in five years. In the long run, however, IKEA will have to renegotiate with the government to reduce the percentage from 30% to a lower percentage. It will be crucial for IKEA to find the best vendors that can produce the quality products at the lowest price.

Last mile supply chain issues

People in India have smaller cars and compact homes in the city. If IKEA is to locate its store outside of the city, customers will face the problems of having to drive a long time to get to the store. Also, low levels of car ownership and a patchy road network would make it harder for customers to shop at IKEA. Therefore, it is in IKEA’s best interest to locate its store in or near the city.

IKEA’s do-it-yourself (DIY) concept may not work in India

People in India prefer readymade furniture or getting it made by their carpenters. Thus, the concept of DIY may not work in India. Given that India is still a developing country, labour cost should be relatively inexpensive. IKEA can still sell its products in flat packs but provide optional delivery and assembly services. It will need to keep the price low so people will use the service. This way, customers with a big car and like to assemble furniture themselves can save money by doing it on their own. Typical customers in India can still enjoy what IKEA can offer at a low price, while still receiving services they expect.

IKEA’s anti-corruption policy

IKEA may face difficulties with the Indian bureaucratic set-up. However, this is an issue that IKEA has to address from within. It will be difficult for IKEA to change the government in India by itself.

Reception of IKEA’s products is unpredictable

It is hard to tell whether consumers in India will like the products that IKEA offers. However, judging from the success that IKEA enjoys worldwide, it is more likely that IKEA’s style of furniture will be well-received. IKEA should raise its brand awareness among the consumers in India by sponsoring events and engaging in charity activities. IKEA can also sponsor some movies and TV shows with its products to promote the brand.